EXHIBIT 10.1  EMPLOYMENT AGREEMENT, DATED NOVEMBER 1, 2001, BETWEEN THE COMPANY
              AND ERIC PAULSON
 
 
                              EMPLOYMENT AGREEMENT
 
 
     THIS AGREEMENT is made and entered into as of the 1st day of November,
2001, by and between NAVARRE CORPORATION, a Minnesota corporation (the
"Company"), and ERIC H. PAULSON, a resident of the State of Minnesota
("Executive").
 
                                   WITNESSETH:
 
     WHEREAS, Executive has a unique knowledge of the Company's business, and
has special expertise in the management and future planning of its affairs, and
has been a key Executive of the Company, helping to develop the image of the
business; and
 
     WHEREAS, the Company believes that Executive's continued involvement in the
management and affairs of the business are essential to its management and
planning in the future; and
 
     WHEREAS, a previous employment agreement expired as of October 31, 2001 and
it is the desire of the parties to extend the terms thereof.
 
     NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and obligations of this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
 
1.   EMPLOYMENT. Subject to all of the terms and conditions of this Agreement,
     the Company hereby employs Executive, and Executive hereby accepts
     employment with the Company, as its President and Chief Executive Officer.
 
2.   DUTIES.
 
     (a)  PRESIDENT/CHIEF EXECUTIVE OFFICER. The services of Executive are
          exclusive to the Company. Executive will devote substantially all of
          his business hours to, and make the best use of his energy, knowledge
          and training in, performing his duties as President and Chief
          Executive Officer of the Company consistent with past practices within
          the general guidelines established by the Board of Directors of the
          Company as the same may, from time to time, be modified by the
          Company's Board of Directors. Executive will report to the Board of
          Directors of the Company and have all the duties commonly associated
          with or appropriate to the office of Chief Executive Officer.
          Notwithstanding anything in this Agreement to the contrary, the duties
          of Executive under this Agreement do not (i) require Executive to
          relocate his principal office or residence from the Minneapolis/St.
          Paul, Minnesota metropolitan area without the prior written consent of
          Executive, or (ii) prevent Executive from owning, directly or
          indirectly, securities of, or otherwise participating in the ownership
          of, any publicly-owned business, trade, industry or venture. Executive
          will perform his duties in a competent and professional manner,
          consistent with that expected of a chief executive officer of the
          Company.
 
<PAGE>
 
     (b)  DIRECTOR. During the term of this Agreement, Executive shall also
          serve as Chairman of the Board of Directors of the Company and shall
          perform all duties incident to services as a director of the Company.
 
3.   TERM. Subject only to earlier termination in accordance with Section 5 of
     this Agreement, Executive's term of employment shall commence on the date
     hereof and continue for a period ending March 31, 2007 (the "Employment
     Period").
 
4.   COMPENSATION AND OTHER INCENTIVES AND PERQUISITES. As compensation for all
     of Executive's services under this Agreement, the Company agrees to pay
     Executive during the Employment Period and on retirement, and Executive
     agrees to accept the following:
 
     (a)  BASE SALARY. A base salary of $350,000 per annum (the "Base Salary"),
          payable in accordance with the Company's standard payroll practices.
          On each anniversary of this Agreement, the Base Salary shall be
          adjusted by the Company's Board of Directors based upon the level of
          performance by Executive, provided that in no event shall the Base
          Salary for any fiscal year hereunder be less than the sum provided
          above for the first full fiscal year.
 
     (b)  PERFORMANCE BONUS. As additional compensation, Executive shall be
          eligible to receive for each fiscal year of the Company ending during
          the Employment Period a bonus (the "Bonus") determined under the Bonus
          formula described below (the "Bonus Formula") by the Board of
          Directors in the manner described below with a maximum bonus equal to
          100% of the Base Salary of Executive (as in effect the first day of
          such fiscal year) (the "Target Bonus"). Executive's Bonus shall be
          paid annually not later than 90 days after the end of the fiscal year
          in which such Bonus is earned. If no Bonus criteria is otherwise
          established by the Board of Directors during the first fiscal quarter
          of a fiscal year of the Company, Executive will be entitled to receive
          a bonus equal to 100% of Executive's Base Salary for such fiscal year.
          By no later than the end of the first fiscal quarter of each fiscal
          year of the Company during the Employment Period, the Board of
          Directors or a committee thereof will establish, for purposes of the
          Bonus Formula only, (i) a targeted net profit for the Company for such
          fiscal year against which actual financial performance will be
          measured for purposes of earning a portion of the Bonus (the "Net
          Profit Component"), (ii) a targeted net sales for the Company for such
          fiscal year against which actual financial performance will be
          measured for purposes of earning a portion of the Bonus (the "Net
          Sales Component"), and (iii) other specific goals to be achieved by
          Executive during such fiscal year (the "Specified Goals Component").
          At the end of such fiscal year, the Board of Directors or a committee
          thereof will determine the Bonus payable to Executive under the Bonus
          Formula with respect to such fiscal year based upon the actual
          financial performance of the Company compared to the Net Profit
          Component and the Net Sales Component and the achievement by Executive
          of the goals specified for such fiscal year as part of the Specified
          Goals Component. Under the Bonus Formula, during any fiscal year
          Executive is eligible to earn an aggregate Bonus equal to (i) up to
          60% of his Base Salary under the Net Profits Component; plus (ii) up
          to 20% of his Base Salary under the Net Sales Component; plus (iii) up
          to 20% of his Base Salary under the Specific Goals Component. The
          calculation of the amount of Bonus to be awarded under each component
          of the Bonus Formula is as set forth in the following chart:
<TABLE>
<CAPTION>
                          Maximum Percentage of                Component                        Component
        Component         Base Salary Awardable               CALCULATION                       Threshold
---------------------     ---------------------        --------------------------------    ------------------------
<S>                               <C>                  <C>                                 <C>
 
NET PROFITS COMPONENT             60%                  Actual net profits for fiscal       Actual Net Profits must
                                                       year ("Actual Net Profits") as a    be at least 70% of
                                                       percentage (not to exceed           Target Net Profits
 
</TABLE>
 
                                       2
<PAGE>
 
<TABLE>
<S>                               <C>                  <C>                                 <C>
                                                       100%) of the target net profit      before a portion of the
                                                       of the Company for such fiscal      Bonus is awarded under
                                                       year ("Target Net Profits")         the Net Profits Component
                                                       multiplied by 60% of Base Pay       of the Bonus Formula.
                                                       for such fiscal year.
 
NET SALES COMPONENT               20%                  Actual net sales for fiscal year    Actual Net Sales must
                                                       ("Actual Net Sales") as a           be at least 70% of
                                                       percentage (not to exceed 100%)     Target Net Sales before
                                                       of target net sales of the          a portion of the Bonus
                                                       Company for the applicable fiscal   is awarded under the
                                                       year ("Target Net Sales")           Net Sales Component of
                                                       multiplied by 20% of Base Pay for   the Bonus Formula.
                                                       such fiscal year.
 
SPECIFIC GOALS COMPONENT          20%                  Up to 20% of Base Pay for a         N/A
                                                       fiscal year based upon the good
                                                       faith judgement of the Board of
                                                       Directors as to the attainment of
                                                       specified goals set by the Board
                                                       of Directors for such fiscal
                                                       year.
</TABLE>
 
Example: For purposes of example only, assume that during a fiscal year ending
during the Employment Period, the Company attains Actual Net Profits equal to
80% of Target Net Profits and Actual Net Sales equal to 60% of Target Net Sales,
in each case as such targets were established by the Board of Directors no later
than the end of the first fiscal quarter of such fiscal year and the Board of
Directors determines that Executive has achieved 50% of the specific goals
established by the Board of Directors for such fiscal year. The Bonus for such
fiscal year would be equal to 58% of Base Salary calculated as the sum of (A)
80% of the 60% of Base Salary attainable under the Net Profits Component of the
Bonus Formula, plus (B) none of the 20% of Base Salary attainable under the Net
Sales Component of the Bonus Formula because that component's benchmark
threshold of 70% of Target Net Sales was not met, and (C) 50% of the 20% of Base
Salary attainable under the Specific Goals Component of the Bonus Formula.
 
     (c)  LOANS AND OTHER LIABILITIES. At the expiration of the Employment
          Period and/or the termination of this Agreement for any reason
          whatsoever, except by the Company for Company Cause pursuant to
          Section 5(a) hereof or by Executive without Executive Cause (as
          defined in Section 5(d) hereof) in which case repayment of
          indebtedness shall be as set forth in Section 6(c) hereof, any and all
          sums owed by Executive to Company as of such date shall be deemed paid
          and satisfied in full including, without limitation, the outstanding
          loan owed by Executive to the Company in the amount of $1,000,000
          evidenced by a Promissory Note dated the date hereof (the "Note").
          During the Employment Period, the Company shall forgive $200,000 in
          outstanding principal and all accrued and unpaid and unforgiven
          interest on the outstanding principal balance of the Note on each of
          March 31, 2003, March 31, 2004, March 31, 2005, March 31, 2006 and
          March 31, 2007.
 
     (d)  INCENTIVE BASED DEFERRED COMPENSATION PLAN.
 
          (i)  PURPOSE. As incentive for his continued employment with the
               Company and to further align his financial interests with the
               financial interests of shareholders of the Company, an incentive
               based deferred compensation plan on the terms of this Section 4
               (d) is hereby established for Executive (the "IDCP"). Under the
               IDCP, during the Employment
 
                                       3
<PAGE>
 
               Period Executive is eligible to earn a single award of up to
               $4,000,000 in deferred incentive compensation based upon the
               sustained appreciation over a thirty consecutive trading day
               period during the Employment Period of the market value of the
               Company's publicly traded common stock, no par value (the "Common
               Stock"). The award of deferred incentive compensation to
               Executive under the IDCP may be increased (but not decreased) to
               $3,000,000 upon a sale or other Change of Control of the Company
               in which the shareholders of the Company receive consideration
               with an implied value in excess of $6.00 per share of Common
               Stock.
 
          (ii) IDCP STOCK APPRECIATION FORMULA. The formula for the amount of
               the deferred incentive compensation award to Executive under the
               IDCP on account of a sustained appreciation in the trading price
               of a share of Common Stock during a 30 consecutive trading day
               period within the Employment Period is as set forth in the chart
               below. Executive may earn a single award under one of Tier I,
               Tier II or Tier III. As more fully described below, in order for
               Executive to be eligible for an award under Tier I of the IDCP,
               shares of common stock of the Company must trade at or above
               $4.00 per share on each trading day during any period of 30
               consecutive trading days. The amount of the award for which
               Executive is eligible increases if, during an applicable
               measurement period of 30 consecutive trading days, the Company's
               common stock trades at or above $7.00 per share on each trading
               day in such period (Tier II) or at or above $10.00 per share on
               each trading say in such period (Tier III). The amount of the
               award is dependent upon the average closing price of a share of
               such common stock during such period. Executive is eligible for
               one award (the largest award for which he qualifies) under the
               stock appreciation formula.
 
 
IDCP STOCK APPRECIATION FORMULA
<TABLE>
<CAPTION>
                      Stock Price Within Any Measurement             AMOUNT OF DEFERRED INCENTIVE COMPENSATION
  Tiers              Period During the Employment Period                     AWARD (WITHOUT DUPLICATION)
----------        --------------------------------------------     ------------------------------------------------
<S>               <C>                                              <C>
TIER I            Equal to or greater than $4.00 per share.        $1,000,000 multiplied by the sum of (A) one plus
                                                                   (B) one-third of the difference, if any, between
                                                                   the Average Stock Price and $4.00 per share, up
                                                                   to a maximum of $2,000,0000.
 
TIER II           Equal to or greater than $7.00 per share and     $2,000,000 multiplied by the sum of (A) one plus
                  less than $10.00 per share.                      (B) one-third of the difference, if any, between
                                                                   the Average Stock Price and $7.00 per share, up
                                                                   to a maximum of $4,000,000.
 
TIER III          Equal to or greater than $10.00 per share.       $4,000,000.
</TABLE>
 
For purposes of the IDCP stock price appreciation formula, (A) "Measurement
Period" means any period during the Employment Period of 30 consecutive trading
days during which Common Stock is traded on a national securities exchange or
through the NASDAQ National Market System ("NASDAQ/NMS") or the National
Association of Securities Dealers Automated Quotation System; (B) "Stock Price"
means, as of any applicable date, (i) if the Common Stock is listed on a
national securities exchange or is authorized for quotation on the Nasdaq/NMS
the closing price, regular way, of a share of Common Stock on such exchange or
NASDAQ/NMS, as the case may be, or (ii) if the Common Stock is neither listed on
a national securities exchange nor authorized for quotation on NASDAQ/NMS, the
closing bid price as reported by the National Association of Securities Dealers
Automated Quotation System for a share of Common Stock; and (C) "Average Stock
Price" means the average of the Stock Prices over the applicable Measurement
Period. In the
 
                                       4
<PAGE>
event of any subdivision or combination of the outstanding shares of Common
Stock, stock dividend, recapitalization, reclassification of shares or other
corporate transaction that would result in the substantial enlargement or
dilution of the rights or economic benefits inuring to Executive under the IDCP,
the Board of Directors shall make such equitable adjustments as it may deem
appropriate to the IDCP.
 
          (iii) IDCP EARNED UPON SALE, MERGER, OR SIMILAR TRANSACTION. Upon the
                occurrence of a Change of Control (as defined in Section 6(e)
                hereof) of the Company effected through an asset sale, merger,
                tender offer, consolidation or other similar transaction in
                which the shareholders of the Company receive consideration on
                account of their shares of Common Stock with a fair market
                value, as determined in good faith by the Board of Directors
                (with assistance of the Company's investment bankers), equal to
                or greater than $6.00 per share, the amount of deferred
                incentive compensation to be awarded to Executive under the IDCP
                shall be increased (but not decreased if Executive has
                previously earned an award of deferred incentive compensation
                under the IDCP equal to or greater than $3,000,0000) to
                $3,000,000.
 
          (iv)  PAYMENT AND FUNDING OF IDCP. Except as provided in Section 6
                hereof, the amount of deferred incentive compensation earned
                under the IDCP during the Employment Period shall be paid to
                Executive, or upon his earlier death, his legal representatives
                or heirs, in three equal installments on the first, second and
                third anniversaries of the termination of Executive's
                employment. The Company shall also pay to Executive, or his
                legal representatives or heirs, as the case may be, on such
                payment dates, an amount equal to the return on such funds if
                Executive and the Company have agreed on the investment of such
                funds or if no such agreement is reached, interest at the 8% per
                annum from the date of termination of employment. The IDCP is an
                unfunded and unsecured nonqualified plan for federal income tax,
                ERISA and Department of Labor purposes. Executive and
                Executive's beneficiaries shall look solely to the Company for
                payment of amounts due under the IDCP. Upon the expiration or
                earlier termination of the Employment Period, the Company shall
                establish a "rabbi trust" as a funding vehicle for the IDCP and
                the Company shall contribute to such trust an amount of cash
                equal to the aggregate amount earned under the IDCP.
 
          (v)   EXAMPLES.
 
                (A) For purposes of example only, assume that during each
                    trading day of a Measurement Period within the Employment
                    Period the Stock Price exceeded $4 per share and the Average
                    Stock Price within such Measurement Period was $4.75 per
                    share. Executive would have earned a Tier I award of
                    $1,250,000 in deferred incentive compensation under the
                    IDCP.
 
                (B) Assume further that subsequently (I) the Stock Price
                    fluctuated above and below $4.00 per share but there was no
                    Measurement Period during which the Stock Price exceeded
                    $4.00 per share and (II) the Company was sold to a third
                    party for cash and stock valued at $5.50 per share.
                    Executive's Tier I award of deferred incentive compensation
                    under the IDCP would be increased to $3,000,000. Had
                    Executive previously earned a deferred incentive
                    compensation award under the IDCP equal to or greater than
                    $3,000,000, no further adjustment would be made on account
                    of the sale of the Company.
 
                (C) Alternatively, assume that after Executive earned the
                    initial $1,250,000 Tier I award, the Stock Price continued
                    to increase until a subsequent Measurement Period during
                    which the Stock Price fluctuated above and below $10.00 per
                    share
 
                                       5
<PAGE>
 
                     (but was never less than $7.00 per share) and the Average
                     Stock Price was $10.50 per share. In lieu of the Tier I
                     award previously earned, Executive's award of deferred
                     incentive compensation under the IDCP would be a Tier II
                     award of $4,000,000.
 
          (e)  BENEFITS.
 
               (i)   EXPENSES. The Company shall reimburse Executive for any and
                     all ordinary, necessary and reasonable business expenses
                     that Executive incurs in connection with the performance of
                     his duties under this Agreement, including entertainment,
                     telephone, travel and miscellaneous expenses, provided that
                     Executive provides the Company with documentation for such
                     expenses in a form sufficient to sustain the Company's
                     deduction for such expenses under Section 162 of the
                     Internal Revenue Code of 1986, as amended. These expenses
                     include all dues and assessments to Executive's social,
                     athletic, golf or country club.
 
               (ii)  MEDICAL AND DISABILITY INSURANCE. Subject to Executive
                     taking and passing the physical examination required by the
                     Company's insurance carrier, the Company shall provide
                     Executive with full medical and disability insurance
                     coverage provided to other officers of the Company.
 
               (iii) LIFE INSURANCE. Subject to the same physical examination
                     and cost provisions, the Company shall provide Executive
                     with a $2,000,000 term life insurance policy insuring
                     Executive's life during the term of Executive's employment
                     with the Company and shall pay all premiums thereon. The
                     Executive shall own such policy and shall be payable to
                     such beneficiary or beneficiaries as Executive directs by
                     written instrument delivered to the Company or the insurer
                     under the life insurance policy.
 
               (iv)  VACATION. Executive shall be entitled to a paid vacation
                     period of four (4) weeks each year, which may be taken at
                     any time subject to the Company's business needs.
 
               (v)   AUTOMOBILE EXPENSES. The Company will pay or reimburse the
                     Executive for all reasonable costs of licensing, sales
                     taxes, property taxes, maintenance, repair, oil, gasoline
                     and insurance for his automobile.
 
               (vi)  BENEFIT CHANGES. No reference in this Agreement to any
                     policy or any employee benefit plan established or
                     maintained by the Company shall preclude the Company from
                     changing any such policies or amending or terminating any
                     such benefit plans if the Company provides a substantially
                     similar benefit to Executive.
 
               (vii) OTHER PLANS. Nothing contained herein is intended to or
                     shall be deemed to be granted to Executive in lieu of any
                     rights or privileges which Executive may be entitled to as
                     an employee of the Company under any other policies or
                     benefit plans that are currently in effect or that may
                     hereafter be adopted. Executive shall be entitled to
                     participate in any other employee benefit plans of the
                     Company generally applicable to officers of the Company,
                     its divisions or subsidiaries, occupying similar positions
                     as Executive, including, but not limited to, any profit
                     sharing, pension, stock option, stock appreciation rights,
                     stock ownership, health, medical, dental, vacation,
                     insurance or other employee benefit plans.
 
                                       6
<PAGE>
 
5.   TERMINATION. This Agreement may not be terminated prior to the end of the
     Employment Period except as follows:
 
     (a)  BY THE COMPANY FOR COMPANY CAUSE. The Company may terminate this
          Agreement for Company Cause upon Executive's material breach of this
          Agreement. Except as to subparagraph (iii) below, the Company shall
          give Executive thirty (30) days' advance written notice of such
          termination, which notice shall be via registered mail, return receipt
          requested, and which shall describe in detail the acts or omissions
          which the Company believes constitute such breach. Notwithstanding the
          foregoing, Executive shall not be deemed to have been terminated for
          Company Cause unless and until there shall have been delivered to
          Executive a copy of a resolution duly adopted by the affirmative vote
          of not less than seventy-five (75%) of the entire membership of the
          Board of Directors (certified by the Secretary of the Board of
          Directors) at a meeting of the Board of Directors called and held for
          the purpose (after reasonable notice to Executive and an opportunity
          for Executive, together with Executive's counsel, to appear before the
          Board), finding that in the good faith opinion of the Board of
          Directors, Executive was guilty of conduct described in this Section
          5(a), and specifying the particulars thereof in detail. The Company
          shall not be allowed to terminate this Agreement pursuant to this
          Section 5(a) if Executive is able to cure such breach within thirty
          (30) days following delivery of such notice. However, in no event
          shall a breach of the provisions of Sections 5(a)(iii) or 7 be subject
          to cure. Acts or omissions which constitute a material breach of this
          Agreement constituting "Company Cause" shall be limited strictly to
          the following:
 
          (i)   Any material breach by Executive of his obligations under this
                Agreement;
 
          (ii)  Gross misconduct of Executive which is manifestly injurious to
                Company, or habitual failure or inability of Executive to
                perform his duties under this Agreement; and
 
          (iii) Any fraud, theft or embezzlement by Executive of the Company's
                assets, or any other unlawful or criminal act which is
                punishable as a felony.
 
     (b)  DEATH. Subject to the provisions of Section 6, this Agreement shall
          terminate upon Executive's death.
 
     (c)  DISABILITY. Subject to the provisions of Section 6, this Agreement
          shall terminate upon Executive's Disability. As used herein, the term
          "Disability" shall have such meaning as set forth in the Company's
          disability policy in effect at the date hereof and shall include both
          permanent and temporary disability, short term and long term
          disability, and total and partial disability. If there is no policy in
          effect at the date of Executive's potential disability, Disability
          shall mean Executive becoming substantially incapable of performing
          his duties hereunder for a period of six (6) months or more.
 
     (d)  BY EXECUTIVE FOR EXECUTIVE CAUSE. Executive shall have the right, at
          his election, to terminate this Agreement, upon thirty (30) days'
          written notice to the Company upon the occurrence, without Executive's
          express written consent, of any one or more of the following events
          ("Executive Cause"), provided that Executive shall not have the right
          to terminate this Agreement if the Company is able to cure such event
          within thirty (30) days following delivery of such notice:
 
          (i)   The Company is in material breach of this Agreement;
 
          (ii)  Executive is required to report to or accept assignments from
                persons other than the Board of Directors of the Company or he
                is removed without his written consent as the President and
                Chief Executive Officer of the Company and such removal is not
                pursuant to Section 5(a) hereof;
 
                                       7
<PAGE>
 
 
          (iii)  The Board of Directors should fail to elect Executive as
                 President and Chief Executive Officer or Chairman of the Board
                 of Directors, or if Executive should have a policy dispute with
                 the Board of Directors;
 
          (iv)   The Shareholders should fail to elect Executive as a director;
 
          (v)    An adverse change in Executive's status or position as an
                 executive officer of the Company, including, without
                 limitation, any adverse change in Executive's status or
                 position as a result of a material diminution in Executive's
                 duties, responsibilities or authority as of the date of this
                 Agreement (or any status or position to which Executive may be
                 promoted after the date hereof) or the assignment to Executive
                 of any duties or responsibilities which, in Executive's
                 reasonable judgment, are inconsistent with Executive's status
                 or position, or any removal of Executive from or any failure to
                 reappoint or reelect Executive to such positions (except in
                 connection with the termination of Executive's employment in
                 accordance with Section 5(a) hereof);
 
          (vi)   A reduction by the Company of Executive's Base Salary as the
                 same may be increased time to time, or a change in the
                 eligibility requirements or performance criteria for any
                 benefit other than salary, which adversely effects Executive;
 
          (vii)  Without replacement by a plan providing benefits to Executive
                 equal to or greater than those discontinued, the failure by the
                 Company to continue in effect, within its maximum stated term,
                 any employee benefit plan in which Executive is participating
                 immediately prior to the date of this Agreement or the taking
                 of any action by the Company that would adversely effect
                 Executive's participation or materially reduce Executive's
                 benefits under any such plan;
 
          (viii) The taking of any action by the Company that would materially
                 adversely effect the physical conditions existing immediately
                 prior to this Agreement in or under which Executive performs
                 his employment duties;
 
          (ix)   The Company's requiring Executive to be based anywhere other
                 than the Minneapolis/St. Paul, Minnesota metropolitan
                 statistical area, except for required travel on the Company's
                 business to an extent substantially consistent with the
                 business travel obligations which Executive has typically
                 undertaken on behalf of the Company prior to the date of this
                 Agreement; or
 
          (x)    Any purported termination by the Company of this Agreement or
                 the employment of Executive by Company which is not expressly
                 authorized by this Agreement or any breach of this Agreement by
                 the Company which is not remedied by the Company within thirty
                 (30) days after the Company's receipt of notice thereof from
                 Executive.
 
6.   PAYMENTS UPON TERMINATION.
 
     (a)  DEATH. Upon Executive's death during the Employment Period, the heirs
          or legal representatives of Executive shall be entitled to receive as
          a lump sum payment, payable within sixty (60) calendar days of his
          death, equal to the sum of (i) 2.99 times the average of the aggregate
          Base Salary and Bonus paid to Executive over the preceding five years,
          plus (ii) the amount of the deferred incentive compensation award
          earned by Executive under the IDCP.
 
                                       8
<PAGE>
 
     (b)  DISABILITY. In the event that this Agreement is terminated due to
          Executive's Disability, Executive shall be paid (i) his Base Salary
          for a period of one year following the date of such Disability or
          until Executive begins receiving benefits under the Company's
          disability benefits plan, whichever occurs first to be paid at the
          times such Base Salary would otherwise be paid during such period,
          (ii) all Bonus to which Executive would have been entitled for the
          fiscal year in which such Disability occurred, prorated to the date of
          Disability to be paid at the time such Bonus would otherwise be paid
          for such fiscal year, (iii) his accrued but unpaid vacation pay for
          the year in which such Disability occurred, pro rated to the date of
          such Disability, (iv) any unpaid expense reimbursement, and (iv) the
          amount, payable in a lump sum within sixty (60) days of the end of the
          fiscal year in which such Disability occurred, of the deferred
          incentive compensation award which Executive would have been awarded
          under the IDCP through the end of the fiscal year in which such
          Disability occurred.
 
     (c)  TERMINATION BY COMPANY FOR COMPANY CAUSE OR BY EXECUTIVE WITHOUT
          EXECUTIVE CAUSE. If Executive is terminated pursuant to Section 5(a)
          hereof, or Executive terminates this Agreement other than in
          accordance with Section 5(d) hereof, the Company shall pay to
          Executive as a lump sum payment, payable within sixty (60) calendar
          days of the date of termination (i) his Base Salary through the date
          written notice is properly mailed to Executive pursuant to Section
          5(a) hereof, (ii) all Bonus payments owing to Executive for the fiscal
          year prior to the year such written notice is received by Executive
          (to the extent that any such payments were unpaid on the date of
          termination), and (iii) the amount of the deferred incentive
          compensation award earned by Executive under the IDCP through the date
          of termination. Additionally all outstanding and unpaid indebtedness
          of Executive to the Company for borrowed money shall be due and
          payable within 60 days of the date of termination.
 
     (d)  TERMINATION WITHOUT COMPANY CAUSE OR BY EXECUTIVE FOR EXECUTIVE CAUSE.
          In addition to any other rights granted Executive hereunder, if the
          Company should terminate this Agreement other than in accordance with
          Section 5(a) hereof, or if Executive should terminate this Agreement
          pursuant to Section 5(d) hereof, the Company shall pay to Executive as
          a lump sum payment, payable within sixty (60) calendar days of the
          date of termination (i) his Base Salary and Target Bonus through the
          end of the term of this Agreement or three years, whichever is
          greater, (ii) any payments owing to Executive pursuant to Section 4(b)
          hereof for the fiscal year prior to the year of termination (to the
          extent any such payments were unpaid on the date of termination),
          (iii) a sum equivalent to any accrued but unpaid vacation for the year
          in which he is terminated, (iv) any unpaid expense reimbursement, and
          (v) the amount of the deferred incentive compensation award earned by
          Executive under the IDCP. Furthermore, for the remainder of the term
          of this Agreement, or three years whichever is greater, the Company
          shall maintain in full force and effect for the continued benefit of
          Executive and his dependents all (i) pension plans, (ii) medical and
          disability policies, (iii) stock option plans, (iv) life insurance
          plans in which Executive participated immediately prior to his
          termination (or if such participation is barred, shall arrange for
          individual policies of insurance providing benefits substantially
          similar, on an after-tax basis, to those which Executive otherwise
          would have been entitled hereunder), and (v) other benefits and
          perquisites to which Executive would otherwise be entitled under
          Section 4 (e).
 
     (e)  CHANGE OF CONTROL AND OWNERSHIP.
 
          (i)  SEVERANCE PAYMENT. In the event that (A) Executive's employment
               with the Company (I) is terminated by the Company (other than in
               accordance with Sections 5(a), (b), or (c) hereof) or (II) is
               terminated by Executive in accordance with Section 5(d) hereof
               during the Employment Period and (B) such termination occurs
               after a Change in Control (as defined hereinbelow), in addition
               to and not in lieu of those payments
 
                                       9
<PAGE>
 
               otherwise due Executive under this Agreement or otherwise,
               Company shall pay Executive a cash bonus ("Severance Payment") in
               an amount equal to Executive's Average Annual Compensation (as
               defined hereinbelow), multiplied by a factor of 2.99.
 
          (ii) EXCISE TAX ADJUSTMENT. Notwithstanding any other provisions of
               this Agreement, in the event that any payment or benefit received
               or to be received by the Executive in connection with a Change in
               Control or the termination of the Executive's employment (whether
               pursuant to the terms of this Agreement or any other plan),
               arrangement or agreement with the Company (all such payments and
               benefits, including the Severance Payment, being hereinafter
               referred to as the "Total Payments") would be subject (in whole
               or part), to the excise tax imposed by Section 4999 of the
               Internal Revenue Code of 1986, as amended (the "Code") (the
               "Excise Tax"), then, after taking into account any reduction in
               the Total Payments provided by reason of Section 280G of the Code
               in such other plan, arrangement or agreement, (i) the Severance
               Payment shall first be reduced, (ii) the cash portion of any
               other Total Payments shall thereafter be reduced, and (iii)
               finally, the non-cash portion of any Total Payments shall
               thereafter be reduced, to the extent necessary so that no portion
               of the Total Payments is subject to the Excise Tax but only if
               (I) the net amount of such Total Payments, as so reduced (and
               after subtracting the net amount of federal, state and local
               income taxes on such reduced Total Payments and after taking into
               account the phase out of itemized deductions and personal
               exemptions attributable to such reduced Total Payments) is
               greater than or equal to (II) the net amount of such Total
               Payments without such reduction (but after subtracting the net
               amount of federal, state and local income taxes on such Total
               Payments and the amount of Excise Tax to which the Executive
               would be subject in respect of such unreduced Total Payments and
               after taking into account the phase out of itemized deductions
               and personal exemptions attributable to such unreduced Total
               Payments); provided, however, that the Executive may elect to
               have the non-cash Total Payments reduced (or eliminated) prior to
               any reduction of the cash Total Payments.
 
                    (B) For purposes of determining whether and the extent to
               which the Total Payments will be subject to the Excise Tax, (I)
               no portion of the Total Payments the receipt or enjoyment of
               which the Executive shall have waived at such time and in such
               manner as not to constitute a "payment" within the meaning of
               Section 280G(b) of the Code shall be taken into account, (II) no
               portion of the Total Payments shall be taken into account which,
               in the opinion of tax counsel ("Tax Counsel") reasonably
               acceptable to the Executive and selected by the accounting firm
               (the "Auditor") which was, immediately prior to the Change in
               Control, the Company's independent auditor, does not constitute a
               "parachute payment" within the meaning of Section 280G(b)(2) of
               the Code (including by reason of Section 280G(b)(4)(A) of the
               Code) and, in calculating the Excise Tax, no portion of such
               Total Payments shall be taken into account which, in the opinion
               of Tax Counsel, constitutes reasonable compensation for services
               actually rendered, within the meaning of Section 280G(b)(4)(B) of
               the Code, in excess of the "base amount" allocable to such
               reasonable compensation, and (III) the value of any non-cash
               benefit or any deferred payment or benefit included in the Total
               Payments shall be determined by the Auditor in accordance with
               the principles of Sections 280G(d)(3) and (4) of the Code.
 
                    (C) At the time that payments are made under this Agreement,
               the Company shall provide the Executive with a written statement
               setting forth the manner in which such payments were calculated
               and the basis for such calculations including, without
               limitation, any opinions or other advice the Company has received
               from Tax Counsel,
 
                                       10
<PAGE>
 
               the Auditor or other advisors or consultants (and any such
               opinions or advice which are in writing shall be attached to the
               statement). If the Executive objects to the Company's
               calculations, the Company shall pay to the Executive such portion
               of the Severance Payment (up to 100% thereof) as the Executive
               determines is necessary to result in the proper application of
               Section 6(e)(ii) hereof.
 
         (iii) DEFINITIONS. (A) For purposes of this Agreement, "Change in
               Control" shall mean (I) the sale of all or substantially all of
               the assets of the Company, (II) the acquisition by any means of
               more than twenty percent (20%) of the issued and outstanding
               voting stock of the Company by any entity, person or group of
               persons acting in concert, (III) the merger of the Company with,
               or the consolidation of the Company into, another corporation or
               entity, or (IV) the election to the Board of Directors of the
               Company without the recommendation or approval of the incumbent
               Board of Directors of the Company the lesser of (x) three
               directors or (y) directors constituting a majority of the number
               of directors of the Company then in office.
 
                    (B) For purposes of this Agreement, "Average Annual
               Compensation" shall mean the average of the Base Salary and the
               Bonus paid to or on behalf of Executive by Company, based on the
               three (3) most recent calendar years.
 
          (iv) ADDITIONAL PAYMENTS. Amounts payable pursuant to this Section
               6(e) shall be in addition to, and not in lieu of, all other
               compensation, rights and benefits accruing or afforded to
               Executive pursuant to this Agreement or the obligations of
               Executive thereunder.
 
7.   PAYMENTS UPON RETIREMENT. At the completion of Executive's employment as
     President, Chief Executive Officer and Chairman of the Company on March 31,
     2007, Executive and his heirs or legal representatives shall be entitled to
     receive, in addition to any payments to be made under the IDCP, the
     following retirement benefits: (i) Average Annual Compensation (as defined
     above) for a period of three (3) years payable at the times such
     compensation would otherwise be payable hereunder, (ii) any payments owing
     to Executive pursuant to Section 4(b) hereof through the date of retirement
     (to the extent any such payments were unpaid on the date of retirement),
     (iii) a sum equivalent to any accrued but unpaid vacation for the year in
     which he retires, and (iv) any unpaid expense reimbursement. Amounts
     payable in accordance with clauses (ii), (iii) and (iv) of the preceding
     sentence shall be paid in a single lump sum within sixty (60) days of the
     completion of Executive's employment. Furthermore, for a period of three
     (3) years after retirement, the Company shall maintain in full force and
     effect for the continued benefit of Executive and his dependents all (i)
     pension plans, (ii) medical and disability policies, (iii) stock option
     plans, (iv) life insurance plans in which Executive participated
     immediately prior to his termination (or if such participation is barred,
     shall arrange for individual policies of insurance providing benefits
     substantially similar, on an after-tax basis, to those which Executive
     otherwise would have been entitled hereunder), and (v) other benefits and
     perquisites to which Executive would otherwise be entitled under Section 4
     (e).
 
8.   OWNERSHIP OF PROPERTIES, CONFIDENTIALITY; NON-COMPETITION AND EXCLUSIVITY;
     INVESTMENTS.
 
     (a)  OWNERSHIP OF PROPERTIES. The Company, as employer, shall own, and
          Executive hereby transfers and assigns to the Company, all rights in
          and to any material and/or ideas written, suggested or submitted by
          Executive during the Employment Period and all other results and
          proceeds of his services under this Agreement (the "Properties").
          Without limiting the generality of the foregoing, these rights shall
          include all motion picture, television, radio, dramatic, musical,
          publication and other rights in and to the Properties, including the
          sole and exclusive right to photograph and record the same with or
          without dialogue, music and other
 
                                       11
<PAGE>
 
          sounds synchronously recorded, and to perform, exhibit, distribute,
          reproduce, transmit, broadcast or otherwise communicate the same
          and/or motion picture, dramatic or other versions or adaptations
          thereof, theatrically, nontheatrically and/or by means of television,
          radio, the legitimate stage, internet or other electronic transmission
          and/or any other means now known or hereafter devised and to
          manufacture, publish, or vend printed and/or recorded versions or
          adaptations thereof, either publicly or privately and for profit or
          otherwise. The Company and its licensees and assigns shall have the
          right to adapt, change, revise, delete from, add to and/or rearrange
          the Properties or any part thereof written or submitted by Executive
          and to combine the same with other works to any extent, and to change
          or substitute the title thereof and in this connection Executive
          hereby waives any so-called "moral rights" of authors. Executive
          agrees to execute and deliver to the Company such releases,
          assignments or other instruments as the Company may require from time
          to time to evidence its ownership of the results and proceeds of
          Executive's services hereunder' provided, however, that nothing in
          this Section 8(a) shall be deemed in any manner to restrict or qualify
          Executive's ownership or right to exploit Executive's personal
          memoirs.
 
          The requirements of this Section 8(a) do not apply to Properties for
          which no equipment, facility or confidential information of the
          Company was used and which were developed entirely on Executive's own
          time, and which (i) do not relate directly to the Company's business
          or to the Company's actual research or development, or (ii) do not
          result from any work Executive performed for the Company. Except as
          previously disclosed to the Company in writing, Executive does not
          have and will not assert any claims to or rights under any Properties
          as having been made, conceived, authored or acquired by Executive
          prior to his employment by the Company.
 
     (b)  CONFIDENTIALITY. Executive acknowledges that his services will,
          throughout the Employment Period, bring Executive in close contact
          with many confidential affairs of the Company and its affiliates,
          including information about costs, profits, financial data, markets,
          trade secrets, sales, products, computer programs, key personnel,
          pricing policies, customer lists, development projects, operational
          methods, technical processes, plans for future development, business
          affairs and methods and other information not readily available to the
          public. Executive further acknowledges that the businesses of the
          Company and its affiliates are international in scope, that their
          products are marketed throughout the world, that the Company and its
          affiliates compete in nearly all of their business activities with
          other organizations which are or could be located in nearly any part
          of the world and that the nature of Executive's services, position and
          expertise are such that he is capable of competing with the Company
          and its affiliates from nearly any location in the world. In
          recognition of the foregoing Executive covenants and agrees:
 
          (i)  that Executive will keep secret all material confidential matters
               of the Company and its affiliates which are not otherwise in the
               public domain and will not disclose them to anyone outside of the
               Company or its affiliates, either during or after the Employment
               Period, except with, the Company's written consent and except for
               such disclosure as is necessary in the performance of Executive's
               duties during the Employment Period; and
 
          (ii) that Executive will deliver promptly to the Company on
               termination of his employment with the Company or at any other
               time the Company may so request, at the Company's expense, all
               confidential memoranda, notes, records, reports and other
               documents (and all copies thereof) relating to the Company's and
               its affiliates' business, which Executive obtained while employed
               by, or otherwise serving or acting on behalf of, the Company or
               which the Executive may then possess or have under his control.
 
                                       12
<PAGE>
 
     (c)  NON-COMPETITION AND EXCLUSIVITY. Executive agrees that (i) during his
          employment with the Company and (ii) during (A) the period for which
          Executive is entitled to receive payments under Section 6 or 7 hereof
          or, if longer, (B) the period which ends three years after the
          termination of his employment with the Company, he will not alone, or
          in any capacity with another entity or person, (x) engage in any
          commercial activity that competes with the Company's business, as it
          is conducted during the Employment Period, within any state of the
          United States, (y) in any way interfere or attempt to interfere with
          the Company's relationships with any of its current or potential
          customers, or (z) attempt to employ any of the Company's then
          employees on behalf of any other entities competing with the Company.
          Executive further acknowledges that all services of Executive shall be
          exclusive to the Company, and that Executive's performances and
          services hereunder are of a special, unique, unusual, extraordinary
          and intellectual character which gives them peculiar value, the loss
          of which cannot be reasonably or adequately compensated in an action
          at law for damages and that a breach by Executive of the terms hereof
          (including without limitation this Section 7) will cause the Company
          irreparable injury. Executive agrees that the Company is entitled to
          injunctive and other equitable relief to prevent a breach or
          threatened breach of this Agreement, which shall be in addition to any
          other rights or remedies to which the Company may be entitled. For
          purposes of this Section 7(c), the term "Company" shall include the
          Company, its successors, assigns and affiliates.
 
     (d)  INVESTMENTS. Notwithstanding anything contained herein to the
          contrary, during the Employment Period and thereafter Executive may
          acquire and/or retain, solely as an investment, and take customary
          actions to maintain and preserve Executive's ownership of:
 
          (i)  securities of any corporation which are registered under Sections
               12(b) or 12(g) of the Securities Exchange Act of 1934 and which
               are publicly traded, so long as Executive is not part of any
               control group of such corporation; and
 
          (ii) any securities of a partnership, trust, corporation, limited
               liability company or other entity so long as (i) Executive
               remains a passive investor in that entity and does not become
               part of any control group thereof (except in a passive capacity)
               and (ii) such entity is not, directly or indirectly, in
               competition with the Company or its affiliates, regardless of
               whether Executive is a passive investor or part of any control
               group thereof.
 
9.   REMEDIES. The parties hereto recognize and agree that, because the material
     breach of this Agreement or any part hereof would result in damages
     difficult to ascertain, upon any allegation of material breach of this
     Agreement, either party hereto shall be entitled:
 
     (a)  PROCEEDINGS. To institute proceedings in a court located in the State
          of Minnesota to enjoin the breach, termination, or threatened
          termination of this Agreement. Such injunctive remedy shall be in
          addition to and not in lieu of any right to recover money damages for
          any such breach.
 
     (b)  COSTS AND EXPENSES. The successful party in any action brought
          concerning the breach or termination of this Agreement shall be
          entitled to recover all costs and expenses, including attorney's fees
          incurred or associated with the enforcement of any covenant of this
          Agreement.
 
     (c)  ADDITIONAL COSTS. Additionally, if there shall be any breach of this
          Agreement by the Company, and Executive shall institute any action (or
          counterclaim) in connection therewith, Executive shall be entitled, if
          successful in such action or if the Company sues and if Executive is
          successful in that action, to recover as damages the discounted value
          (at a rate of 6%) of all amounts unpaid under this Agreement, or
          Executive may, at his election, recover as damages
 
                                       13
<PAGE>
 
          each monthly payment of Base Salary and additional compensation at
          such time as it becomes payable or would have become payable under the
          terms of this Agreement, and the Company agrees not only to pay such
          sums, but, in addition thereto, interest thereon at the prime rate
          then in effect, until such payment is made. In any such action, the
          fact that Executive did or did not seek or engage in any other
          employment or in other activities shall not affect, reduce or mitigate
          the amount of recovery allowable to Executive. Executive's rights
          hereunder, upon his death, accrue to his legal representatives or to
          his designated beneficiary.
 
10.  MISCELLANEOUS.
 
     (a)  SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to the
          benefit of the Company's successors and assigns, provided, however,
          that this Agreement may not be assigned by any of the parties hereto
          without the prior written consent of each of the parties hereto. This
          Agreement shall be binding upon and inure to the benefit of any
          successor of the Company, and any such successor shall absolutely and
          unconditionally assume all of the Company's obligations hereunder.
          Upon the written request of Executive, the Company shall seek to have
          any successor, by agreement in form and substance satisfactory to
          Executive, assent to the fulfillment by the Company of its obligations
          under this Agreement. Failure to attain such assent at least thirty
          (30) business days prior to the time a person or entity becomes a
          successor in interest to the Company shall be considered Executive
          Cause for termination of this Agreement in accordance with Section
          5(d) hereof.
 
     (b)  OFFSETS. In no event shall any amount payable to Executive pursuant to
          this Agreement be reduced for purposes of offsetting, either directly
          or indirectly, any indebtedness or liability of Executive to Company.
 
     (c)  COUNTERPARTS. This Agreement may be executed in one or more
          counterparts, each of which shall be deemed to be an original but all
          of which together shall constitute one and the same instrument.
 
     (d)  CONSTRUCTION. Wherever possible, each provision of this Agreement will
          be interpreted so that it is valid under the applicable law. If any
          provision of this Agreement is to any extent invalid under the
          applicable law, that provision will still be effective to the extent
          it remains valid. The remainder of this Agreement also will continue
          to be valid, and the entire Agreement will continue to be valid in
          other jurisdictions.
 
     (e)  WAIVERS. No failure or delay by either the Company or Executive in
          exercising any right or remedy under this Agreement will waive any
          provision of this Agreement, nor will any single or partial exercise
          by either the Company or Executive of any right or remedy under this
          Agreement preclude either of them from otherwise or further exercising
          these rights or remedies, or any other rights or remedies granted by
          any law or any related document.
 
     (f)  CAPTIONS. The headings in this Agreement are for convenience of
          reference only and do not affect the interpretation of this Agreement.
 
     (g)  MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be altered,
          modified or amended except by an instrument in writing signed by all
          of the parties hereto. No person, whether or not an officer, agent,
          employee or representative of any party, has made or has any authority
          to make for or on behalf of that party any agreement, representation,
          warranty, statement, promise, arrangement or understanding not
          expressly set forth in this Agreement or in any other document
          executed by the parties concurrently herewith ("Parol Agreements").
          This Agreement and all other documents executed by the parties
          concurrently herewith constitute the
 
                                       14
<PAGE>
 
          entire agreement between the parties and supersede all express or
          implied, prior or concurrent, Parol Agreements and prior written
          agreements with respect to the subject matter hereof including, but
          not limited to, that certain Employment Agreement, dated September 1,
          1993, that certain Amendment to Employment Agreement, dated December
          1, 1993 and that certain Employment Agreement, dated October 1, 1996.
          The parties acknowledge that in entering into this Agreement, they
          have not relied and will not in any way rely upon any Parol
          Agreements.
 
     (h)  GOVERNING LAW. The laws of the State of Minnesota shall govern the
          validity, construction and performance of this Agreement. Any legal
          proceeding related to this Agreement shall be brought in an
          appropriate Minnesota court, and each of the parties hereto hereby
          consents to the exclusive jurisdiction of the courts of the State of
          Minnesota for this purpose.
 
     (i)  NOTICES. All notices and other communications required or permitted
          under this Agreement shall be in writing and sent by registered first
          class mail, postage prepaid, and shall be deemed received five (5)
          days after mailing to the addresses stated below:
 
          If to the Company:
 
          Navarre Corporation
          7400 49th Avenue North
          New Hope, Minnesota 55428
          Attention: Chairman of the Board of Directors
 
          If to Executive:
 
          Eric H. Paulson
          2605 Maple Ridge Lane
          Excelsior, Minnesota 55331
 
     (j)  SURVIVAL. Notwithstanding the termination of this Agreement or
          Executive's employment with the Company, the terms of this Agreement
          concerning rights and remedies of the parties shall survive such
          termination and shall govern in perpetuity all rights, disputes,
          claims or causes of action arising out of or in any way related to
          this Agreement.
 
                                       15
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
 
 
 
                                       NAVARRE CORPORATION
 
 
                                       By:
                                           ---------------------------------
                                           Its:
                                                ----------------------------
 
 
 
                                       -------------------------------------
                                       Eric H. Paulson
 
 
                                       16